How Social Reputation Networks Interact with Competition in Anonymous Online Trading: An Experimental Study

31 Pages Posted: 1 Apr 2008

See all articles by Gary E. Bolton

Gary E. Bolton

Pennsylvania State University - Department of Supply Chain & Information Systems

Claudia Loebbecke

University of Cologne - Department of Media and Technology Management

Axel Ockenfels

University of Cologne - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: April 2008

Abstract

Many Internet markets rely on "feedback systems", essentially social networks of reputation, to facilitate trust and trustworthiness in anonymous transactions. Market competition creates incentives that arguably may enhance or curb the effectiveness of these systems. We investigate how different forms of market competition and social reputation networks interact in a series of laboratory online markets, where sellers face a moral hazard. We find that competition in strangers networks (where market encounters are one-shot) most frequently enhances trust and trustworthiness, and always increases total gains-from-trade. One reason is that information about reputation trumps pricing in the sense that traders usually do not conduct business with someone having a bad reputation not even for a substantial price discount. We also find that a reliable reputation network can largely reduce the advantage of partners networks (where a buyer and a seller can maintain repeated exchange with each other) in promoting trust and trustworthiness if the market is sufficiently competitive. We conclude that, overall, competitive online markets have more effective social reputation networks.

Keywords: reputation systems, e-commerce, internet markets, trust

JEL Classification: D44, L14

Suggested Citation

Bolton, Gary Eugene and Loebbecke, Claudia and Ockenfels, Axel, How Social Reputation Networks Interact with Competition in Anonymous Online Trading: An Experimental Study (April 2008). CESifo Working Paper Series No. 2270, Available at SSRN: https://ssrn.com/abstract=1114755

Gary Eugene Bolton

Pennsylvania State University - Department of Supply Chain & Information Systems ( email )

Dept. of Supply Chain & Information Systems
University Park, PA 16802-3306
United States
814-865-0611 (Phone)
814-863-2381 (Fax)

Claudia Loebbecke

University of Cologne - Department of Media and Technology Management ( email )

Pohligstr. 1
Cologne, 50969
Germany

Axel Ockenfels (Contact Author)

University of Cologne - Department of Economics ( email )

Albertus Magnus Platz
Cologne 50923
Germany

HOME PAGE: http://ockenfels.uni-koeln.de/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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